Morning Coffee: London bankers get a double helping of disaster, and Goldman Sachs’ new IBD SWAT team

Brexit has been weighing on the London investment banking job market for the last two years, as big banks threaten to move roles to EU financial centres, and growth and investment plans have been put on hold or even cancelled. Now we have some quantification of how bad things have got, via a survey from Morgan McKinley which suggests that the number of jobs available in the City of London has halved since 2017. The number of candidates looking for moves has also halved, suggesting that people are more inclined to try to hang on to what they’ve got rather than testing the market.

But just as the Brexit saga begins to look like it might be heading for some sort of resolution, with perhaps fewer overall job losses to the continent than had been expected, another threat comes along. With the seeming impasse in the political system, a General Election seems more and more likely and that raises the possibility of a Labour government led by Jeremy Corbyn.

Analysts at Citi have run the numbers on the current Labour list of political promises, and they reckon that the effect of a Corbyn-led government on the banking system might be every bit as bad as a no-deal Brexit (which is itself not by any means out of the realm of possibilities). A big fiscal deficit and the likelihood of capital flight, plus higher corporation taxes, controls on housing and employment protection reducing cost flexibility would act like a neutron bomb on the earnings per share of the domestic banks, with global banks doing somewhat better as their overseas revenues would be boosted by translation into a devalued pound sterling.

There is also the possibility of nationalisation – Labour have stated an intention to nationalise and break up the Royal Bank of Scotland, and to launch a National Investment Bank which would compete head to head with the private sector for corporate lending business. With all this arriving just as the banks were dealing with the cost and administrative overhead of losing their European “passports” post-Brexit, it doesn’t look like a great environment for recruiting; it’s not impossible to see that job openings number could halve again.

Is there any silver lining? Possibly. Socialist governments often have a habit of setting out wish lists in opposition and then getting a lot more realistic when faced with the economic and market consequences of putting them into practice. In a post-Brexit economy, any government of any political type is going to need to be careful about the risks of a currency or fiscal crisis, Labour or Conservative. So it’s unlikely that all the policies analysed by the Citi team would hit the financial sector all at once; and a climate of easy monetary policy and substantial government borrowing is not always the worst environment to generate fee income. Even Brexit might get postponed, which prolongs the uncertainty but also dilutes the impact.

Elsewhere, after a disappointing set of results, Goldman Sachs is once more focusing attention on its new “smaller companies” team. This operation now has 40 bankers servicing 1,000 clients with enterprise value of $2bn or less, and the intention according to Glenn Schorr is to staff it up to 100 full time employees. The money is to come from trimming operations in other areas, particularly commodities.

It’s a fairly simple idea – if you can do ten deals with $1m fees, then that’s the equivalent of one deal with $10m fees, as long as each of the smaller deals takes a tenth of the work or less. Historically, Goldman has taken the view that the cost economics are not that good and concentrated its attentions on the big companies and potential fee payers. But things change, and with greater use of technology and support staff, Goldman’s “SWAT team” think that they can make the numbers add up. And, of course, out of a thousand smaller companies, particularly in the technology sector, you might be lucky to find two or three with the potential to grow into big fee payers. So expect to see the Goldman business card coming out in lobbies in towns all over the MidWest.

Meanwhile...

Although ambitious divisional managers have given interviews saying that they expect no revenue attrition at all, analyst estimates are solidifying around a figure of €1.7bn of negative synergies (Bloomberg)

…while global regulators want to see Deutsche’s US investment banking operations scaled back whether or not the merger goes ahead, in direct opposition to Paul Achleitner’s vision of a European investment banking champion (FT)

Jeffries hasn’t been put off political risk by the underwriting stick it’s holding in NSO Group – the US investment bank is attempting to handle the share sale of Caliburn International for its private equity sponsor, a government contracting firm which runs detention centres where migrant children are separated from their families (FT)

The gender pay gap at fintech firms is, on average, larger than that at the big investment banks (Financial News)

Large UK investors like Richard Buxton of Merian and Andy Cummings of Aviva are lining up behind the Barclays management against the activist shareholders (Investment Week)

“It’s just not possible to be a senior partner and have a family”, said a senior partner while looking at a photograph of his wife and kids. The Magic Circle is trying to do something about the “motherhood penalty” in promotion (FT)

Quant funds like AQR and TwoSigma are attempting to apply big data and alt-data insights to the private equity industry. They’re starting in areas like railcar and aircraft leasing but might move further into traditional buyout territory (FT)

Meanwhile, HFT bots have discovered a new happy hunting ground on cryptocurrency exchanges, many of which lack equity exchanges’ protections against spoofing, front-running and other “Flash Boys” tactics (Bloomberg)

Jeb Hensarling, former chairman of the House Financial Services Committee, has passed through the revolving door and taken a job with UBS (MarketWatch)

Careers after banking – after having been a commercial loan officer at Southern Bank, Shayne Silvers decided to start writing novels about a supernatural detective called Nate Temple and self-publishing them on Amazon. Now he’s a millionaire and planning another 20 books this year (SBJ).

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